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Early Thoughts on Milavetz

posted by Bob Lawless
This morning, the Supreme Court issued its decision in Milavetz on prebankruptcy attorney-client counseling and bankruptcy attorney disclosures. I've got to get to a meeting so I don't have time for an extended post. The early reporting has been technically correct but misleading, e.g., Reuters, "US top court upholds lawyer bankruptcy advice law." The decision upheld the law but construed its most troubling provision--section 526(a)(4)--in a very narrow way, eliminating almost all concerns about the statute. It appears to come out about the way I expected.


As a consumer practitioner, I am especially troubled by Page 14 of the Slip Opinion. The middle paragraph never outright says so, but it seems to intimate that obtaining secured debt that will be reaffirmed in contemplation of filing -- typically, buying a new car to bring oneself into qualification under the means test -- is now a "no-no." This is a DRAMATIC development for bankruptcy consumer practice, but I also expect it will be YEARS in litigation because the discussion of the concept by the Court is almost invisible.

@ Arnie. Right. And then the court noted in fn 6:

Thus, advice to refinance a mortgage or purchase a reliable car prior to filing because doing so will reduce the debtor’s interest rates or improve his ability to repay is not prohibited, as the promise of enhanced financial prospects, rather than the anticipated filing, is the impelling cause.

So, you can buy a new car before filing, you just can’t surrender it in bankruptcy?

Apart from these nuances, from the standpoint of the First Amendment the opinion strikes me as being on the slippery slope.

It says what attorneys can not tell their client - ie. to abuse the system, but it does not tell the attorney to specifically say anything at all - ie. tell the client not to abuse the system.

So, if attorneys stop telling their clients not to load up on debt, does this opinion exonerate the attorney?

There will always be unintended consequence to Congress and the Courts trying to proscribe what the First Amendment prohibits - limiting free speech.

Bob -- the hypo I hoped they would address is attorneys fees in Ch13 cases. Of course the bankruptcy filing is the "impelling cause" for incurring the debt to an attorney to file the case. You and I probably agree that there is nothing abusive or manipulative about advising a debtor to incur debt to her attorney to pay the filing fee? to file the case? -- including that repayment of that debt will be provided through the plan. (The "no down payment Chapter 13" advertisements are a big controversy in Louisiana right now.) Okay so far under Sotomayor's construct? What about borrowing the filing fee and/or attorneys fee from a friend? a relative? a credit card? Can the DRA give that advice? Trouble ahead.

OK.. so you can't advise a debtor (assisted person) in incur debt in contemplation of filing or not to load up... right? Also @ fn 6....this blew me away.... "Advice to incur additional debt to buy groceries, pay medical bills, or make other purchases "reasonably necessary for the support or maintenance of the debto or a dependent of the debtor" $ 523(a)(2)(C)(ii), is SIMILARLY PERMISSIBLE".....?????

So if a debtor does not have "limited nonexempt property" and say its all exempt and it is consumer debt we are talking about...Is that person an "assisted person"? If so, then the definition of an "assisted person" would vary State to State....right?????

This also had my head scratching.... So they basically said that because of the means test we have to have that language about debt relief agencies and incurring debt. "The test promotes debt or accountability but also enhances incentives to incur additional debt prior to filing, as payments on secured debts offset a debtor's monthly income under the formula"...

going to finish reading...

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